By: Joseph M. Leone
In a landmark decision, the Supreme Court of Indiana, held in Service Steel Warehouse Co., L.P. v. United States Steel Corp., 2022 WL 713361 (March 10, 2022), that a material supplier who supplied material to an off-site fabricator had a right to a mechanic’s lien, irrespective of the fact that the off-site fabricator did not perform any actual work on the project site. Prior to this decision, courts in Indiana had long held that a material supplier who supplies material to another material supplier (i.e., a “supplier to a supplier”) is too remote to have the right to a mechanic’s lien. City of Evansville v. Verplank Concrete & Supply, Inc., 400 N.E.2d 812 (Ind. Ct. App. 1980). Until now, the crux of every material supplier’s mechanic’s lien argument was whether the purchaser of the materials performed on-site work, thus defining them as a contractor or subcontractor and not a material supplier. However, in the newly published decision of Service Steel, the Supreme Court of Indiana reversed the entire line of cases going back to 1897 and held that the status of the purchaser of materials was immaterial to the material supplier’s lien rights.
In Service Steel, the project owner, U.S. Steel, contracted with a design-build contractor to design and construct two facilities in Gary, Indiana. The design-builder subcontracted certain steel fabrication services to Troll Supply. Troll Supply, in turn, purchased steel from Service Steel Warehouse. Service Steel Warehouse supplied steel material to Troll Supply at an off-site location and not directly to the project site. Troll Supply then fabricated the various steel components out of the steel supplied by Service Steel Warehouse and delivered the fabricated steel components to the project site for installation by others. When Troll Supply failed to pay for the steel, Service Steel Warehouse recorded its mechanic’s lien notice, claiming a lien on US Steel’s real estate and, ultimately, filed a foreclosure action on the mechanic’s lien to enforce its remedy.
The trial court granted summary judgment for U.S. Steel under the theory that Troll Supply was also a material supplier, therefore, Service Steel Warehouse was a material supplier to a material supplier and, under Indiana law, was not entitled to a mechanic’s lien. The Court of Appeals reversed, determining that Troll Supply was actually a subcontractor and not a material supplier which made Service Steel Warehouse’s lien valid. The Court of Appeals reasoned that a subcontractor was one who performs a substantial portion of the project and the location of where that performance occurred is immaterial. Since Troll Supply performed a substantial portion of the work on the project in fabricating the steel components (even if off-site), it was a subcontractor. U.S. Steel appealed the decision and the Supreme Court of Indiana accepted transfer. Serv. Steel Warehouse Co., L.P. v. U.S. Steel Corp., 173 N.E.3d 1021 (Ind. 2021).
The opinion by Justice Massa began with a comprehensive review of the history of past cases involving material supplier’s lien rights. In the early days of the mechanic’s lien statute, material suppliers were unambiguously granted lien rights for materials supplied for construction. However, even then, the nature of the purchaser became an issue for courts to consider. In Colter v. Frese, 45 Ind. 96 (1873) and Barker v. Buell, 35 Ind. 297 (1871), the Supreme Court of Indiana addressed the question of whether a material supplier who provided materials to someone other than the property owner had the right to a mechanic’s lien. In both cases, the Court determined that material suppliers did have mechanic’s lien rights when the material supplier had supplied material to the prime contractor (Colter) or to a subcontractor (Barker).
However, beginning in Caufield v. Polk, 17 Ind. App. 429, 46 N.E. 932 (1897), when the Indiana Court of Appeals first addressed the issue of whether a material supplier to a material supplier had the right to a mechanic’s lien, courts in Indiana have read into the mechanic’s lien statute the requirement that a material supplier provide materials to one who performs on-site work and not to another material supplier in order to be entitled to the lien. The reasoning was that a material supplier to another material supplier was too remote to be entitled to a lien. Otherwise, any material supplier, no matter how far removed, would potentially have lien rights, causing an unfair burden on property owners. This same holding was reiterated in Rudolf Hegener Co. v. Frost, 60 Ind. App. 108, 108 N.E. 16 (1915) and in Verplank, under the same theory.
The Indiana Supreme Court then looked at the actual language of the mechanic’s lien statute and noted that the statute provided a material supplier the right to a mechanic’s lien, without any reference to the nature of the purchaser of the materials, citing to I.C. 32-28-3-1. The Court noted that the only requirement of the mechanic’s lien statute was that the material supplier supply material for the building. The language of the statute does not require the material supplier to supply material to one who performs on-site work. Therefore, the Court reasoned, the material suppler must only show that it supplied material “’for the particular building upon which’ it bases its lien.” Service Steel, citing Talbott v. Goddard, 55 Ind. 496, 502 (1876).
Interestingly, the Indiana Supreme Court specifically did not address the reasoning cited in prior opinions that a material supplier to a material supplier is too remote to be entitled to a lien, or the perceived unfairness to property owners in guaranteeing payment to a much broader range of lien claimants. Instead, the Supreme Court acknowledged that “there may be valid reasons to prohibit supplier-to-supplier-based liens,” but, it is not within the judicial branch’s authority to read that into the statute. If the law is to be changed—the Supreme Court reasoned—it must be done by the legislature.
Note that the Supreme Court stated that the materials must have been furnished for the particular project; as such, the lien claimant must still provide proof that the materials were intended for the project and were actually delivered to the project site. In discussing the validity of suppliers’ liens, the opinion does not make a distinction between the act of furnishing materials for a particular project and the actual use of the materials in the project; therefore, presumably, the holding does not affect the “Presumed Use Rule.” See e.g. Van Wells v. Stanray Corp., 168 Ind. App. 35, 341 N.E.2d 198 (1976). A remote material supplier lien claimant will still have to provide some proof that the specific materials it sold to the purchaser were actually delivered to the project site. This may be difficult in some cases. For instance, it is unlikely that commodity materials will be segregated enough and specifically identifiable enough to justify mechanic’s liens for those remote suppliers.
It will be interesting to see how the participants in the construction industry react to this decision. Remote material suppliers will likely make more of an effort to specifically identify materials on a project-by-project basis, and to obtain proof that the materials were delivered to the project. Property owners and lenders will undoubtedly require broader and stricter lien waivers, as will contractors and subcontractors. An entire segment of the industry, material suppliers, may now be forced to implement new administrative infrastructure to obtain lien waivers from innumerable downstream material suppliers.
The law of mechanic’s liens in Indiana has undergone a seismic shift in the blink of an eye. Time will tell just how fundamentally this case will change the construction industry, but, that change is likely to be quite significant.
For questions or more information about mechanic’s liens, contact Joseph Leone at jleone@dsvlaw.com or your DSV attorney.
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